Yahoo Finance Has Anglo Asian Mining PLC's (LON:AAZ) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Most readers would already be aware that Anglo Asian Mining's (LON:AAZ) stock increased significantly by 8.3% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Anglo Asian Mining's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Anglo Asian Mining
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Anglo Asian Mining is:
6.2% = US$7.4m ÷ US$118m (Based on the trailing twelve months to December 2021).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.06 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Anglo Asian Mining's Earnings Growth And 6.2% ROE
When you first look at it, Anglo Asian Mining's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 20%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Anglo Asian Mining was able to grow its net income considerably, at a rate of 27% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Anglo Asian Mining's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 18%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Anglo Asian Mining's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Anglo Asian Mining Making Efficient Use Of Its Profits?
Anglo Asian Mining's three-year median payout ratio is a pretty moderate 48%, meaning the company retains 52% of its income. So it seems that Anglo Asian Mining is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Additionally, Anglo Asian Mining has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
On the whole, we do feel that Anglo Asian Mining has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Anglo Asian Mining.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
